The document provides an overview of compensation management, emphasizing the importance of compensation strategies in attracting, retaining, and rewarding quality staff while aligning with organizational objectives. It discusses the components of designing effective pay structures, including internal and external equity, and outlines various types of pay/reward structures and models. Additionally, the document highlights the challenges and considerations small to medium-sized businesses face in maintaining competitive compensation practices to engage and motivate their employees.

1. Compensation Management
Unit-III
Lecture - 1
Introduction to Pay Structure

2. Unit-III
Compensation Packages:
• Tools in Designing, Improving & Implementing
• Designing Compensation Packages for specific
type of Human Resources

3. Compensation:
Compensation is the methods and practices of maintaining balance
between interests of operating the company within the fiscal budget
and attracting, developing, retaining, and rewarding high quality
staff through wages and salaries which are competitive with the
prevailing rates for similar employment in the competitive markets.
Compensations is the cornerstone of an effective talent management
strategy.
Compensation strategies can affect many facts of the business.
Such as;
Improved employee morale and retention
Increased employee engagement and productivity
Strengthened governance and compliance with company vision
and mission 3

4. Compensation Model
The Compensation model should be closely knitted with following three
elements i.e.
•Management Strategy
•Compensation Plan Design
•Performance
4

5. This relates to the basic existence of any organization its
objectives and goals i.e. vision and mission of the enterprise,
for which human resources are hired, and the organization
pays to its employees to keep them motivated for
accomplishing those set objectives in a cost effective manner.
Compensation Plan Design
Compensation Plan Design
Job Analysis
Job Description
Market Wage Survey Job Evaluation
Pay Structure
5

6. Pay Structure
The basis for most pay programs is a pay structure - A
hierarchy of jobs with pay ranges and/or rates assigned. Pay
structures are designed so that the greater the worth of a job
(determined by internal or external equity), the higher the pay
grade and range. A pay program has certain objectives. The
principal ones are as follows:
•Internal equity.
•External equity (or competitiveness),
•Individual equity,
•Process equity,
•Performance or productivity incentives,
•Maximum use of financial resources,
•Compliance with laws and regulations, and
•Administrative efficiency
6

7. PAY STRUCTURE
What is pay structure?
The relative pay of different jobs (job structure) and how much
they are paid (pay level).
What is pay level?
The average pay, including wages, salaries and bonuses, of jobs in
an organization.
What is Job structure?
The relative pay of jobs in an organization.

8. Pay structure concepts and
consequences :
Pay Structure considerations includes:
a) Direct payment (wages, salaries, unbounds )
b) Indirect payments (health insurance, social security,
unemployment compensation)
c) Staffing level Ways of enhancing the organizational
reduction. Staff reduction. Hiring freeze Wages and salary
freeze Sharing benefits costs.
d) Labor market competition : This is the amount an
organization must pay to compete against other
companies that hire similar employees. It includes product
markets that hire similar types of employees.
e) Employee as resource: Employee is a resource that
company has to invest and from it expect valuable
returns.

9. STRATEGIC Consideration:
RATE RANGES Different employees in the same job may have
different pay rates. It permits a company to recognize differences in
employees performance, seniority, training. For example, blue-
collar jobs may have single rate of pay for all employees within the
job.
KEY JOBS AND NONKEY JOBS:
KEY JOBS: (Benchmarking) used in pay surveys, that have relatively
stable content and are common to many organizations.
NONKEY JOBS: Jobs that are unique to organizations and that
cannot be directly valued or compared through the use of market
survey.

10. DECIDING WHAT TO PAY?
Efficiency wage theory : It states that wages influence worker
productivity. It explains the circumstances in which benefits of
higher pay outweigh the higher costs.
Market pay surveys: To compete for talent organizations use
benchmarking. Benchmarking is a procedure in which it compares
it's own practices against those of the competition.

11. Nature’s Dilemma
“ Sriram Industries” is a mechanical engineering establishment situated in Bombay. It has
15,000 workmen employed in first shift between 8-16 hours. This is a major shift and
known as general shift. The workmen of Sriram Industries report for work from distance
places such as Pune, Virar and also Karjat, which are miles away from the place of work.
The workers travel by Central Railway, Western Railway (Suburban Services) and by BEST
buses (BEST is the local Municipal bus transport organisation). Some also travel by petrol
driven vehicles or their own bicycle. A small number staying in surrounding areas of the
factory, report for duty on foot.
On 27 June 1990, there was a very heavy downpour, which is not uncommon in Bombay.
Vast areas were submerged under water. Central and western sub urban railway services,
therefore, were completely dislocated. As a result of the heavy rains, train services were
suspended between 7 – 8 am.. BEST buses were less frequently run and in some areas
there was no bus service at all. A few timekeepers who somehow managed to attend took
attendance. It was found that out of the total complement, 4000 attended in time, 2600
attended two hours late, 4800 attended four hours late and the remaining 3600 did not
attend.
As was obvious, neither the management nor the workmen was responsible for the
aforesaid happening and the trade union, operating in the establishment requested the
management to deal sympathetically with the employees. They requested that since it
was beyond the control of workmen, even those who could not attend should not be
marked absent.

12. The union leader had produced a certificate from Railway authorities and also
BEST authorities about the complete dislocation between 7-8.30 am and a
partial dislocation till 2.30 pm. As will be seen from the case, 4000 employees
worked for the whole day, 2600 worked for six hours, 4800 worked for four hours
only and 3600 did not report for duty at all. The issue was how to adjust the
wages for the day.
The General Manager called a meeting of the officers to discuss the issue. It was
found that a good number of officers who stayed in long distance suburbs or
were staying in remote areas could not also attend to work. Some of the officers
who participated in the meeting, opined that ‘no work no pay’ should be the
only principle and at best the only thing that the management should do is not
to take any disciplinary action as such. Others expressed different views and
there was no near-consensus even in the meeting. The General Manager
adjourned the meeting without coming to any decision. Relation between the
management and the three unions operating in the company were generally
satisfactory. Only one of the three unions that had mainly white colored staff as
members had a legalistic approach in all matters and was not easily satisfied.
How can this issue be sorted out?

13. Thanks

14. Lecture - 2
Important issues to be considered while
designing a Compensation package

15. Creating a Smart Compensation Package
Are you paying your employees what they're worth?
Here's how to develop a pay plan that will help you attract top
talent.
• Competitive pay is the most recognizable part of a company's
compensation and benefits package, and it's key in gaining and
maintaining an advantage in the marketplace. Some of the first
tools used to gain that advantage are market salary reports, which
are used to determine the going market pay rate in similar
companies and industries.
• When trying to keep up with market salary reports and the going
market rates, small to medium-size businesses are sometimes at a
disadvantage. Why is that? For one thing, the uniqueness of job
roles within smaller companies can make it difficult to compare job
responsibilities in the market and obtain suitable salary
comparison data. A company's degree of competitiveness and
ability to pay what the market bears can be another challenge.

16. • But the going market rate must be considered in an effort to achieve
and maintain external equity. If you're a business owner concerned
with retaining top talent, you must consider the compensation
practices of other companies in your industry as a tool for reducing
both turnover and recruiting costs. Especially in a business where
employees believe they can receive better pay for performing the
same work somewhere else, there's little incentive to stay with an
employer; therefore, you must be concerned with external equity.
• Factors within a company must also be taken into consideration when
you're addressing compensation issues. Internal equity seeks to
place the same value on jobs that are similar in nature, responsibility
and requirements. Jobs requiring greater skills or more responsibility
are seen as more valuable than lower-skilled jobs. But remember,
how your employees view their compensation is just as important as
the compensation package itself. The potential exists for pay
programs to be misunderstood or characterized as unfair, subjective
or downright unlawful. In some cases, there may be merit to those
perceptions.

17. Overall, a good pay program should be SMART,
S = Strategically based:
M = Market tough:
A = Analyzed thoroughly:
R = Reward results:
T = Transformative:

18. Meaning it should be-
• S = Strategically based: When designing a pay structure, you should look
at your company's goals and take its future business direction into
account, while rewarding and recognizing employee performance.
• M = Market tough: You should also look at the market and monitor what
the market is doing to regularly attract and retain the best.
• A = Analyzed thoroughly: You must analyze not only the market but also
the jobs your employees are doing, and the jobs your employees will be
expected to do in the future to maintain that competitive edge.
• R = Reward results: Reward results and recognize potential. Most
employers want to give incentives to encourage employees toward an
expected end rather than fully paying out dividends based solely on
potential. Integrating rewards with recognition strategies allows you to
encourage employees to exceed performance expectations.
• T = Transformative: You don't want a compensation plan that's totally
out of line with what the business environment looks like today--your
plan should resemble the times. Therefore, your practices and reward
elements should constantly change with the times.

19. In building your compensation program, remember that your
objective is to create a compensation program that will:
• Attract and retain top talent;
• Motivate your employees to achieve and maintain high
performance;
• Ensure competitive and consistent pay practices;
• Comply with applicable federal and state laws and
regulations;
• Operate within the constraints of your budget and financial
resources;
• Ensure administrative efficiency; and
• Allow you to offer competitive salaries relative to the labor
market.
Smartly integrated compensation plans take into account what's
necessary for your company to maintain its competitive edge today
and its sustained growth tomorrow. When compensation dollars are
limited, including a good balance of benefits, recognitions and
rewards can create a more appealing offering--and help you attract
and retain top talent.

20. Levels in organizational Structure

21. Creating an Organizational hierarchy:
Board of Directors
Senior Management
Senior Operating Managers, and Top
Professionals and Administrators
Mid level Operating Managers, Professionals
and Administrators
Operative Employees
Final level Operating Managers, Minimally
Experienced Professionals and Administrators

22. Major Groups and common titles:
Board of Directors
Chairman of the Board
Inside and Outside
Members

23. Senior Management
President,
Chief Executive Officers,
Chief Operating Officers,
Executives (TOP) Vice President

24. Senior Operating Managers, and Top
Professionals and Administrators
Division Heads,
Vice President (VPs)
reporting to EVPs

25. Mid level Operating Managers, Professionals
and Administrators
Immediate Supervisors,
Entry Level Professionals
and Administrators

26. Operative Employees
Professionals,
Technicians,
Administrative support,
Skilled craft and trades,
Semiskilled crafts and trades,
Production workers and
Unskilled Labors

27. Basic Groups for Compensation structure:
1. Managers:
• Executives
• Senior
• Operating
2. Administrators
3. Salesperson

28. 4. Pro-Tec
Professionals
• Physicians
• Attorneys
• Scientists
• Engineers
• Teachers
Paraprofessionals
• Medical
• Legal
• Scientific
• Engineering
• Education
Technicians:
• Medical
• Legal
• Scientific
• Engineering

29. 5. Administrative Support:
• Administrative Assistant
• Secretaries
• Clerical
6. Operative:
• Skilled Craft workers
• Semi-skilled workers
• Unskilled workers
• Secretarial clerical

30. Thanks

31. Lecture 3
Pay/Reward Structure

32. Pay /Reward Structure
There are 7 main types of Pay/Reward structures:
1. Graded Salary Structure
2. Individual job Range
3. Progression or Pay Curves related to
Competency level
4. Job Family system
5. Spot rates
6. Pay Spine
7. Rate for Age

33. Graded Salary Structure:
Develop Grades
• A grade is a horizontal grouping of different
jobs that are considered substantially equal
for pay purposes.
• Grades enhance an organization’s ability to
move people among jobs within a grade with
no change in pay.

34. Constructing Ranges:
Develop Grades
• The objective is for all the jobs that are
similar for pay purposes to be placed within
the same grade.
• How many pay grades?
a. number of jobs
b. organization hierarchy
c. reporting relationships

35. Constructing Ranges: Establishing
Midpoint, Minimum, and Maximum
• Pay ranges refer to the vertical dimension
of the pay structure.
• Each pay grade will have associated with it a
pay range consisting of a midpoint and a
specified minimum and maximum.

36. • Midpoints correspond to the competitive pay
policy
• The point where the pay policy line crosses
each grade becomes the midpoint of the pay
range for that grade
• Midpoints are the control point of the range

37. PAY
Our Job Evaluation Points
PAY GRADE STRUCTURE
100 150 200 250 300 350
our
monthly
salary
(0000)
8
7
6
5
4
3
2
1
Pay Policy Line
I
II
III
IV
V

39. A Sample graded Pay Structure
a

40. A Non overlapping Graded Pay Structure

41. An overlapping Pay structure
a

42. An overlapping Pay structure

43. Differentials

45. a

46. Number of Grades

47. proliferation

48. a

49. a

50. a

51. a

53. Points to note:
• The salary range is typically +/- 15 to 25% percent of the
midpoint.
• The salary midpoint of a grade is typically 20-30% higher
than the
preceding grades salary midpoint.
• The maximum of a grade may be higher than the
minimum of the next higher grade (but doesn't need to be)

54. Broad Bands
Jobs
R
s
Multiple Grades
Jobs
Rsx
Spot Salaries
x
xx
x
x
x
x x
x
Jobs
R
s
 30%-50% 100%Range Width
 20% - 40% 50%Overlap
 6 or more Grades 4-5 BandsNumber Bands
 Midpoints based on market
rates
 Job Evaluation
 Market Anchors
 Pay Zones
Control  Market Anchors
 Pay Zones
DIFFERENT PAY STRUCTURE

55. Broad Bands
Jobs
R
s
Multiple Grades
Jobs
R
s
x
Spot Salaries
x
xx
x
x
xx x
x
Jobs
R
s
 Clearly indicates internal
relativities
 Control pay policy and
budgets
 Can be used to determine
benefits eligibility
 Enhances organisational flexibility
 Framework for managing pay and
career development
 Allows for reward for growth within
band
 Emphasis on individual contribution
and market
 Can be used to determine benefits
eligibility
Advantages  Flexible
 Responsive to the
market
Risks  Could lead to issues with internal
relativities
 Less control over cost
 Requires accurate benchmarking
and data management
 Issues with flexibility
 Pay progression only possible
through job promotion
 Promotion culture
Flexibility
Market Sensitive
Control
Internal Equity
 Could lead to issues with internal
relativities
 Employees may perceive lack of
promotional opportunities
DIFFERENT PAY STRUCTURE

56. Problems with Grades
Since pay is an emotional subject and since assigning jobs to grades is invariably
an exercise in judgment, there will always be disputes.
The key to avoiding and resolving conflict is to have a good management process.
This means:
• Being thoughtful when you assign jobs to grades
• Following the same process for everyone
• Making the process as open and transparent as is practical
• Having respected people assign jobs to grades
• Having some kind of appeal process (this can be informal)
• When there is a dispute look for the underlying business issue (i.e. this key
employee is going to quit) rather than focusing on the mechanics of the system
(i.e. they are at the pay maximum of the grade)
Legal Issues
Many jurisdictions have rules to ensure that pay is equitable. Normally, this
doesn't impact the grade structure per se, only how jobs are assigned to grades.
However, if management attempts to design a grade structure that somehow
manages to discriminate against some group, then it could lead to legal trouble.

57. Pay level and mix focus attention
on two objectives:
Control Labour Costs
Attract and Retain
Employees

58. Pay Mix Policy Alternatives
Base
50%
Bonus
17%
Options
16%
Benefits
17%
Performance - Driven
Base
70%Bonus
6%
Options 4%
Benefits
20%
Market Match
Base
50%
Bonus
10%
Options
10%
Benefits
30%
Work - Life Balance
Base
80%
Benefits
20%
Security (Commitment)

59. Case

60. Thanks

61. Designation(s) PB Pay Band (Rs.) Grade Pay/ Academic Grade Pay
(Rs.)
Director -- 80000 (fixed) --
Deputy Director, Professor, Dean (VGSOM), Chief System Manager PB-4 37400-67000 10500
Registrar, Librarian PB-4 37400-67000 10000
Associate Professor, Principal System Manager PB-4 37400-67000 9500
Assistant Professor, Deputy Librarian, Senior Networking Engineer, Senior
Scientific Officer, Senior System Analyst, Senior System Manager
PB-3 15600-39100 8000
Superintending Engineer, Deputy Registrar PB-3 15600-39100 7600
Programmer, Programmer Gr I, Scientific Officer Gr I, System Engineer Gr I, PB-3 15600-39100 7000
Executive Engineer, Senior Medical Officer, Lecturer (Sr Scale), Counsellor,
Security Officer
PB-3 15600-39100 6600
Assistant Librarian, Sports Officer PB-3 15600-39100 6000
Assistant Registrar, Engineer , Assistant Workshop Superintendent, Hindi Officer,
Software Engineer, , System Analyst, Senior Research Assistant, Medical Officer, ,
Manager,
PB-3 15600-39100 5400
Senior Superintendent, Senior Library Information Officer PB-2 9300-34800 5400
Library Information Officer, Senior Accounts Officer, Senior Assistant Engineer,
Senior Sanitary Inspector, Senior Staff Nurse, Senior Superintendent, Senior
Technical Superintendent, Senior Accounts Officer, Senior Horticulture Assistant,
PB-2 9300-34800 4800
Accounts Officer, Assistant Library Information Officer, Senior Pharmacist, Senior
Staff Nurse, Superintendent, Technical Superintendent,
PB-2 9300-34800 4600
Assistant Security Officer, Junior Accounts Officer, Assistant Engineer, Senior
Library Information Assistant, Junior Engineer, Junior Superintendent, Junior
Technical Superintendent, Physical Training Instructor Gr I, Senior Assistant
Engineer, Senior Driver (SG), Technical Assistant (Physical Education), Senior
Security Inspector, Staff Nurse, Pharmacist
PB-2 9300-34800 4200
Senior Laboratory Assistant, Driver Gr I, Pharmacist, Senior Assistant, Senior
Technician, Overseer
PB-1 5200-20200 2800
Canteen Manager Gr III, Driver Gr II, Security Guard Gr I, Sub-Overseer PB-1 5200-20200 2400
Junior Assistant , Driver Gr II, Junior Laboratory Assistant, Junior Technician,
Security Inspector, Senior Attendant
PB-1 5200-20200 2000
Attendant PB-1 5200-20200 1900
Junior Attendant, Security Guard, PB-1 5200-20200 1800
Pay structure of Institute Staff
In addition to the basic pay, staff members get dearness allowance and other benefits at par with Central Government employees.

62. Components of Compensation system:
The literal meaning of compensation is to counter-balance.
In the case of human resource management, compensation
is referred to as money and other benefits received by an
employee for providing services to his employer. Money
and benefits received may be in different forms-base
compensation in money form and various benefits, which
may be associated with employee's service to the employer
like provident fund, gratuity, and insurance scheme, and
any other payment which the employee receives or
benefits he enjoys in lieu of such payment.
Cascio has defined compensation as follows:
"Compensation includes direct cash payments, indirect
payments in the form of employee benefits and incentives
to motivate employees to strive for higher levels of
productivity”

63. Based on above description of compensation,
we may identify its various components as
follows:
1. Wage and Salary:
Wage and salary are the most important
component of compensation and these are
essential irrespective of the type of organization.
Wage is referred to as remuneration to workers
particularly, hourly-rated payment.
Salary refers to as remuneration paid to white-
collar employees including managerial personnel.
Wages and salary are paid on the basis of fixed
period of time and normally not associated with
productivity of an employee at a particular time.

64. 2. Incentives:
Incentives are the additional payment to
employees besides the payment of wages and
salaries. Often these are linked with
productivity, either in terms of higher
production or cost saving or both.
These incentives may be given on individual
basis or group basis.

65. 3. Fringe Benefits:
Fringe benefits include such benefits which
are provided to the employees either having
long-term impact like provident fund, gratuity,
pension; or occurrence of certain events like
medical benefits, accident relief, health and
life insurance; or facilitation in performance of
job like uniforms, Canteens, recreation, etc.

66. 4. Perquisites:
These are normally provided to managerial
personnel either to facilitate their job
performance or to retain them in the
organization.
Such perquisites include company car, club
membership, free residential accommodation,
paid holiday trips, stock options, etc.

67. 4.Bonuses.
Employee bonuses, which are usually paid in a
single lump at the end of the year, are one
way of providing performance incentives.
Profit-sharing plans are a more formal way of
doing this, but they're not as effective for
rewarding individual performance and
compensating employees for meeting their
goals.

68. 5. Long-term incentives.
Stock options or stock grants not only provide
long-term incentives to employees, but they
can also help retain valuable team members
through your organization's crucial start-up
phase.

69. 6. Health insurance.
Employer-sponsored health insurance is fairly
standard among medium-size companies. And it's
a benefit that has great value to employees. An
employer-sponsored plan saves employees
money and gives them peace of mind in knowing
that they won't be denied coverage, even if they
have existing health problems.
If you think you can't afford it, think again. Providing
insurance to your employees sends the message that you care
about their health and the health of their families. To
minimize costs, consider having employees pick up part of the
tab. Employees who have coverage through a spouse may
want to opt out of a plan, particularly if there's a cost
associated with it.

70. 7. Life and/or disability insurance.
This is also a benefit that usually costs less when
it's purchased by an employer rather than an
individual.
8. Retirement plans.
401(k) plans have become popular because they
are relatively easy to administer and are less
expensive than traditional pension plans. Many
employees like these plans because they
maintain some control over the amount of their
contribution and how the money is invested.
Most small companies try to put some kind of
savings or 401(k) plan in place, even if they don't
contribute money to them.

71. 9. Time off and flexible schedules.
This includes holidays, vacations, sick days and
personal days. An employer unable to offer
competitive salaries may close part of the gap by
offering more time off or flexible work hours.
Some employers make no distinction between
sick, vacation and personal days and allow
employees a set number of days off each year to
be used at their discretion. This prevents
employees from abusing sick days and keeps
employees from feeling that they need to lie
when a child is ill or a personal emergency
arises.

72. 10.Miscellaneous compensation.
Other forms of compensation to consider
include employee assistance programs, which
can provide everything from psychological
counseling to legal assistance; discounts on
company products; use of a company cars;
and any other incentives that motivate
employees and give your company a
competitive advantage.

73. Lecture - 5
Compensation for
Managers and Executives

74. Incentives for Managers and
Executives
15%
15%
10%
60%
Salary
Short term
Long term
Benefits
33%
38%
21%
8%
Salary
Short term
Long term
Benefits
Incentives breakdown for a mature company
Incentives breakdown for a startup company

75. Managers play a central role in influencing divisional and
corporate profitability, and most firms therefore put
considerable thought into how to reward them.
Most managers get short-term bonuses and long-term
incentives in addition to salary. For firms offering short-
term incentive plans, virtually all—96%—provide those
incentives in cash. For those offering long-term incentive
plans, about 48% offer stock options, which are intended to
motivate and reward management for long-term corporate
growth, prosperity, and shareholder value.
For mature companies, executives’ base salary, short term
incentives, long-term incentives, and benefits might be
60%, 15%, 15%, and 10%, respectively.
For growth companies, the corresponding figures were
40%, 45%, 25%, and 10%. About 69% of companies in one
survey had short-term incentives, although nearly a third of
those said they didn’t consider them effective in boosting
employee performance.

76. The Annual Bonus
• A bonus is aimed at motivating short term
performance with three issues to consider
when awarding them:
– Eligibility – based on job level and salary
– Fund size – use a formula
– Individual awards – based on performance

77. • Eligibility Most firms opt for broad eligibility—they include both top- and lower-level
managers—and mainly decide who’s eligible in one of two ways. Based on one
survey, about 25% of companies decide eligibility based on job level or job title.
About 54% decide eligibility based on a combination of factors, including job
level/title, base salary level, and discretionary considerations (such as identifying key
jobs that have a measurable impact on profitability). Base salary level alone is the
sole determinant in less than 3% of the companies polled.
• Fund size formula
Some use a nondeductible formula. They use a straight percentage (usually of the
company’s net income) to create the short-term incentive fund. Others use a
deductible formula, on the assumption that the fund should start to accumulate only
after the firm has met a specified level of earnings. Some firms don’t use a formula at
all, but make that decision on a totally discretionary basis.
Other formulas used for determining the executive bonus fund are as follows:
1. Ten percent of net income after deducting 5% of average capital invested in
business.
2. Twelve and one-half percent of the amount by which net income exceeds 6% of
stockholders’ equity.
3. Twelve percent of net earnings after deducting 6% of net capital.
• Individual Awards The third task is deciding the actual individual awards. Typically,
a target bonus (as well as maximum amount, perhaps double the target bonus) is set
for each eligible position, and the actual award reflects the person’s performance.
The firm computes performance ratings for each manager, computes preliminary
total bonus estimates, and compares the total amount of money required with the
bonus fund available. If necessary, it then adjusts the individual bonus estimates.

78. Manager’s Performance Bonus
• Bonus for managers is either individual or
corporate performance based or both
• Split it with part based on individual performance
rest on corporate performance
• Never give outstanding performers too little
• Never give poor performers normal or average
awards
Multiplier approach
for bonus

79. • One question is whether managers will receive bonuses
based on individual performance, corporate performance,
or both. Here again, there are no hard-and-fast rules. Firms
usually tie top-level executive bonuses to overall corporate
results (or divisional results if the executive heads a major
division). But as one moves farther down the chain of
command, corporate profits become a less accurate gauge
of a manager’s contribution.
• Many firms tie short-term bonuses to both organizational
and individual performance. Perhaps the simplest way is
the split-award method, which breaks the bonus into two
parts. Here the manager actually gets two separate
bonuses, one based on his or her individual effort and one
based on the organization’s overall performance.
• Whichever approach you use, the rule is: Don’t pay
outstanding performers less than their target reward,
regardless of organizational performance, and pay them
substantially larger awards than you do other managers.
The company cannot afford to lose these people.

80. Long Term Incentives
• Stock options
• Different stock option plans
• Performance plans
• Cash plans
• Other plans

81. Employers use long-term incentives to inject a long-term
perspective into their executives’ decisions. With only short-term
criteria to shoot for, a manager could boost profitability by reducing
plant maintenance, for instance; this tactic might catch up with the
company two or three years later. Long-term incentives also
encourage executives to stay with the company by letting them
accumulate capital (usually options to buy company stock) that can
only be cashed in after a certain number of years—“golden
handcuffs,” as some call them.
Firms don’t just use stock options for this: Other popular long-term
incentives (discussed below) include cash, stock, stock appreciation
rights, and phantom stock.
Stock option : The right to purchase a stated number of shares of a company stock at today’s
price at some time in the future.
Mega-option grants : Large, upfront grants in lieu of annual grants.
Different Stock Option Plans : The key employee program may go to a handful of top
executives and provides significant economic incentives to motivate these people and to
keep them on board.

82. Long Term Incentives (Cont.)
• Other Plans
– Stock appreciation
– Performance achievement
– Stock options
– Phantom stock
• Performance Plans
• Cash Versus Stock Options

83. • There are several other stock-related long-term incentive plans. Stock
appreciation rights permit the recipient to exercise the stock option (by
buying the stock) or to take any appreciation in the stock price in cash,
stock, or some combination of these. A performance achievement plan
awards shares of stock for the achievement of predetermined financial
targets, such as profit or growth in earnings per share. With restricted
stock plans, the firm usually awards shares without cost to the
executive: The employee can sell the stock (for which he or she paid
nothing), but is restricted from doing so for, say, five years. Under
phantom stock plans, executives receive not shares but “units” that are
similar to shares of company stock. Then at some future time, they
receive value (usually in cash) equal to the appreciation of the
“phantom” stock they own.
• Traditional executive incentives (like stock options) often don’t build in
any real risk for the executive, so the executives’ and the shareholders’
interests could diverge. The solution is to design the plan so that
executives don’t prosper unless the company does. Performance plans
are one means for doing so. They are “plans whose payment or value is
contingent on financial performance measured against objectives set at

84. Stock Options
• A stock option is the right to purchase a stated
number of shares of a company stock at a preset
price at some time in the future
• A mega-option grant is a large, upfront stock option
grant in lieu of annual grants
• Some stock plans are different for each employee
• A restricted stock option is an option grant which has
constraints on its use

85. Performance Plans
• Executives do not prosper unless the
company does
• Executives have some “skin in the game”
• Value is contingent on financial performance

86. • Performance plans are one means for doing so.
They are “plans whose payment or value is
contingent on financial performance measured
against objectives set at the start of a multi-year
period.”
• Use a plan where executives do not prosper
unless the company does
• Make executives have some risk to garner their
reward – a multiyear bonus
• So use plans whose value is contingent on
financial performance measured against
objectives set at the start of a multi-year period

87. Cash Versus Stock Options
Which do you think is a better
motivator?

88. • A study by consultants McKinsey and Company
suggests that stock options may be the simplest
and wisest route. About half the companies
surveyed had stock options only, and about half
had performance-based plans in which managers
were given cash bonuses for long-term
performance.
• A study by consultants McKinsey and Co found
long-term cash and stock options had the same
effect on a company
• However stock options plans cost much less to
implement so may be the preferred route
• It recommends using measures that correlate
with shareholder wealth creation, such as return
on equity

89. Long-Term Incentives
For Overseas
Executives
• Tax implications can be tricky
• May be responsible for both country and
foreign taxes – may defeat the incentive
• Plans must consider various factors:
– Tax treatment
– Regulatory environment
– Foreign exchange controls

90. Strategy and Executive Compensation
• Long-term incentives have a profound impact on
strategic success
• When designing a compensation plan, 1st define
strategic context
• Create package
• Ignore firm’s strategy at your own peril

91. Steps to a Compensation Package
• Include external and internal issues
– What are our long term goals?
– How can compensation support them?
• What defines the work culture and how
can the package be molded to it?
– What are our competitive challenges?
– What are our specific business objectives?

92. 1. Define the strategic context for the executive
compensation program, including the internal and
external issues that face the company, and the firm’s
business objectives. For example, ask: What are our
organization’s long-term goals, and how can the
compensation structure support them? What defines
the organization’s work culture—its basic values
regarding what people should and should not do—and
how will the compensation program mold that culture?
What competitive challenges do we face? What are
our company’s specific business objectives—for
example, growth in market share or expansion
abroad—and how can the compensation program help
push the company in that direction? And how will the
executive compensation program fit into the
organization’s overall pay strategy?

93. Steps to a Compensation Package
(Cont.)
• Shape components into balanced plan
• Meet unique company and strategic needs
• Legal and tax effective
• Install a review and evaluation process

94. 2. Based on your strategic aims, shape each component of the
executive compensation package (base salary, short-term
incentives, long-term incentives, and benefits and
perquisites), and then group the components into a balanced
plan that makes sense in terms of these aims.
3. Create a stock option plan that gives the executive
compensation package the special character it needs to
meet the unique needs of the executives and the company
and its strategy.
4. Check the executive compensation plan for compliance with
all legal and regulatory requirements and for tax
effectiveness.
5. Install a process for reviewing and evaluating the executive
compensation plan whenever a major business change
occurs.

95. Lecture - 6

96. Incentives for Salespeople -
Salaries
• Sales compensation can be salaried,
commission-based or hybrid
• Salaries make sense when job is primarily
prospecting or servicing clients
• Useful when relocating to new territories
• Can de-motivate very productive workers

97. Incentives for Salespeople -
Commissions
• Pay only for results
• Easy to understand and compute
• Focus only on high volume items
• May ignore non-selling aspects
• Performance is a product of ability
• May result in high turnover

98. Research Insight – Commissions Only
“If I go on vacation, I lose money. If I’m sick, I
lose money. If I’m not willing to drop everything
on a moment’s notice to close with a customer, I
lose money. I can’t see how anyone could stay in
this job for long. It’s like a trapeze act and I’m
working without a net!”

99. Incentives for Salespeople -
Combination
• These are the 3 most common
salary/commission ratios
• All cushion downside risk while
also limiting upside reward
• Next slide shows a more
complicated formula

100. Incentives for
Salespeople - Combination
• Sales:
– Up to $18,000 a month = base salary + 7% of gross profits
+ 0.5% of gross sales
– From $18,000 to $25,000 a month = base salary + 9% of
gross profits
– Over $25,000 a month = base salary + 10% of gross profits
• All three steps include an additional amount of 0.5%
of gross sales

101. Developing A Job Structure :
Job structure: It is the relative worth of various jobs in the organization,
based on internal comparisons.
Job structure decisions are made through the following::
a) Job Evaluation Is composed of compensable factors and a weighting
scheme based on the importance of each compensable factor to the
organization. Compensable factors are the characteristics of jobs that an
organization values and chooses to pay.
b) Point Factor System After generating scores for each compensable
factor on each job, job evaluators often apply a weighting scheme to
account for the differing importance of the compensable factors to the
organization.
Weight can be generated in two ways:
A prior weight- factors are weighted using expert judgments about the
importance of each compensable factors.
Empirical derivation- weights can be derived empirically based on how
important each factor seems in determining pay in the labor market.

102. Developing A Pay Structure :
Use of three pay setting approaches:
A. Market survey data
B. Pay policy line and
C. Pay grades
A. Market Survey data. An approach with the greatest emphasis on
external comparisons (market survey data) is achieved by directly
basing pay on market surveys that cover as many key jobs as possible
B. Pay Policy Line: Combining information from external and internal
comparisons to derive pay rates for both key and non key jobs.
C. Pay Grades: This is to group jobs into a smaller number of pay classes
or pay grades. Each job within a grade would have the same rate
range.

103. CONFLICT BETWEEN MARKET PAY SURVEYS
AND JOB EVALUATION :
The relative worth of jobs is quite similar whether based on market
pay survey or job evaluation. However some inconsistence arise.
These are usually indicated by jobs whose average survey pay is
significantly below or above the pay policy line.
HOW THIS CONFLICTS CAN BE RESOLVED :
An organization can resolve to use only the internal control An
Organization can formulate its own strategy by choosing to be a pay
leader
There are no right answers. An organization should consider its
strategy and what jobs and/or functions will be critical for success.

104. MONITORING COMPENSATION COSTS :
A way to examine the difference between policy and practice is to
compute a compa-ratio, which is an index of correspondence for actual
and intended pay.
THE IMPORTANCE OF PROCESS ISSUES :
a) Participation Employee participation to their date, in pay level
decisions remains fairly rare. But it is important to distinguish
between participation by those affected by policies and those who
must actually implement the policies. Line managers involvement in
any change to existing pay practices is necessary.
b) Communication It is important how an organization communicates
pay cuts to it’s employees. Managers play the most crucial
communication role because of their day to day interactions with
their employees. Thus must be prepared to explain why the pay
structure us designed as it is.

105. CURRENT CHALLENGES :
Problems with Job-Based Pay Structures.
1. May encourage bureaucracy: Bureauracy may encourage lack of
flexibility and a lack of initiative on the part of employees.
2. Hierarchical nature reinforces a top down decision making:
Structure's hierarchical nature reinforces a top down decision
making and information flow as well as status differentials-
prevent taking advantages of skills and knowledge of closet to
production
3. Becomes a barrier to change Bureaucracy: Becomes a barrier to
change because wholesale change to job descriptions involves a
lot to time and cost.
4. It may not reward desired behaviors.
5. Encourages promotion seeking behavior Emphasis on job levels
and status differentials encourages promotion-seeking behavior
but discourage lateral employee movement.

106. Responses To Problem With Job
Based Pay Structure :
1. Delayering and Banding Reducing number of job levels to
achieve more flexibility in job assignments and in assigning
merit increases.
2. Paying the person: pay for Skill, Knowledge, & Competency
Moving away from linking pay to jobs and towards building
structures based on individual characteristic such as skill and
knowledge. Skill-based pay systems seems to fit well with the
increased breadth and depth of skill that changing technology
continues to bring.

107. Government Regulation of
Employee Compensation :
Equal Employment Opportunity EEO regulation prohibits
sex, religion, nation of origin and race based differences
in employment outcomes such as pay unless justified by
business necessity. Organizations must deal with
changing labor market and demographic realities.

108. NEW DEVELOPMENTS IN DESIGN OF
PAY STRUCTURES :
With globalization there is need for organizations to be competitive
both in labor costs and productivity.
The nature of pay structures is undergoing a fundamental change.
One such change is the move to power pay levels to reduce labor
costs and bureaucracy.
Some employers are shifting from paying employees for narrow
jobs to giving them broader responsibilities and paying them to
learn the necessary skills

109. Designing Compensation and
Benefit Packages
Chapter 12

110. LEARNING OBJECTIVES
After reading this chapter you should be able to:
• Describe basic elements of a compensation package.
• Explain different features of base pay and employee benefit
plans.
• Explain various types of individual incentives, including the
strengths and weaknesses of each form of incentive.
• Explain various types of group and organizational incentives,
including the strengths and weaknesses of each form of
incentive.
• Create compensation packages that align the mix of individual,
group, and organizational incentives with human resource
strategy.

111. How Can a Strategic Compensation Package Make
an Organization Effective?
• The compensation package represents the
blend of rewards employees receive from the
organization.
• Money paid as wages or salary is the largest
component of most compensation packages.
• Benefits and short and long term rewards
make up the rest of the package.

112. HOW DO COMPENSATION PACKAGES ALIGN WITH
STRATEGY? (LO1)
• At-risk Compensation
– At-risk pay is compensation that can vary from pay period to pay
period.
– The money is at risk because the employee will not earn it unless
performance objectives are met.
• Line of Sight
– The extent to which employees can see that their actions influence the
outcomes used to determine whether they receive a particular
reward.
• Common Elements of Compensation Packages

113. Common Elements of Compensation Packages
• The main elements of the Compensation
Package consist of:
– Base pay is a form of compensation that is not at
risk and may consist of an hourly wage or an
annual salary.
– Employee benefits, are rewards other than
monetary salary and wages. Organizations are
required by laws and tax regulations to provide
similar benefits to all employees.

114. Elements of the Compensation Package
• Individual incentive is a reward that is based
on the personal performance of the
employee. Individual incentives are linked to
performance behaviors and outcomes.
• A group incentive is a reward based on the
collective performance of a team or
organization.

115. Figure 12.1 Combining Compensation
Package Elements.

116. WHAT ARE COMMON APPROACHES TO BASE
PAY? (LO2)
• Two basic methods:
– Each job is evaluated with a point system, and
base pay is set at a higher level in jobs worth more
points.
– Skill sets are defined in terms of the number of
tasks that an employee is capable of performing.
Employees who are able to perform more tasks
are paid a higher base wage.

117. WHAT ARE COMMON EMPLOYEE BENEFIT
PLANS? (LO3)
Legally Required Benefits
• Social Security
• Unemployment Insurance
• Workers Compensation

118. Discretionary Benefits
• Common discretionary benefits include:
– health-care plans
– supplemental insurance
– retirement savings
– pay without work.

119. Figure 12.2 Percentage of Workers Receiving
Benefits

120. Figure 12.3 Accrual of Retirement Benefits.

121. WHAT ARE COMMON INDIVIDUAL
INCENTIVES? (LO4)
• Piece-rate incentive, where employees are paid a
fixed amount for each piece of output they produce.
• Commissions represent a special form of piece-rate
compensation that is most often associated with
sales. For each sale obtained, a commission, or
percentage of the total amount received, is paid to
the salesperson.
• Merit pay increase, represent an increase in base
salary or hourly rate that is linked to performance

122. COMMON INDIVIDUAL INCENTIVES
• Merit bonus is a sum of money given to an
employee in addition to normal wages, is
given on a fixed schedule, such as at the end
of the year.
• Sometimes bonuses are unplanned and given
when high performance is observed.

123. WHAT ARE COMMON GROUP AND
ORGANIZATIONAL INCENTIVES? (LO5)
• Goal-based team reward, provides a payment
when a team reaches a specific goal.
• Discretionary team bonus, which provides
payment when high performance is observed.
With discretionary rewards, no goal is set to
achieve a specific outcome.
• Team Award are usually
– Divided equally among the team or
– Higher-performing members receive a greater reward
then other team members.

124. Group and Organizational Incentives
• Gainsharing occurs when groups of workers receive a
portion of the financial return from reducing costs and
improving productivity.
• Profit sharing occurs when employees receive incentive
payments based on overall organizational profits.
• Stock plans transfer corporate stock to individual
employees. Two popular programs are:
– stock options, which represent the right to buy company stock at a
given price on a future date and could be tied to performance or
pay grade.
– employee stock ownership plans (ESOPs), in which the
organization contributes stock shares to a tax-exempt trust that
holds and manages the stock for employees

125. Issues that increase the likelihood of success
for gainsharing programs

126. HOW DO STRATEGIC DECISIONS INFLUENCE A COMPENSATION
PACKAGE? (LO6)
• The organization must decide how much
compensation to allocate to base pay,
benefits, individual incentives, and group
incentives in order to align pay to the
organization’s broad HR strategy.

127. Figure 12.4 Strategic Compensation Process.

128. Figure 12.5 Typical Compensation Elements